Canadian bank ETFs can provide an attractive mix of safety, income and growth for investors. As well, top Canadian bank stocks are well known for their financial stability in the face of economic downturns.

Exchange traded funds (ETFs) are set up to mirror the performance of a stock market index or sub-index. They hold a more or less fixed selection of securities that represent the holdings that go into the calculation of the index or sub-index.

Here’s a look at the benefits of Canadian bank ETFs and how they can fit into your portfolio.

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Buy a Canadian bank ETF to boost you portfolio stability and returns

Banks remain key lower-risk investments for almost any portfolio. As well, the big-five Canadian bank stocks all have long histories of annual dividend increases. Canadian banks have long given conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and records; low-to-moderate ratios of per-share price-to-earnings; and above-average long-term capital gains.

In short, Canadian banks stocks are some of the best income-producing securities for you as a Canadian investors.

We’ve long recommended that most Canadian investors should own two or more of the Big Five Canadian bank stocks—Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s mainly because of their importance to Canada’s economy.

We believe Canadian bank stocks are still well positioned to weather downturns in the Canadian economy, contrary to pessimistic forecasts on the banks’ prospects from some in the business media. As well, they trade at attractive multiples to earnings and continue to raise their dividends.

Understand the traits of a Canadian bank ETF before buying to ensure a smart decision

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio.

Diversification is one of the most attractive features of top ETFs. In addition, most ETFs are low-cost investments.

Remember that ETFs trade on the exchange like stocks so that you pay a commission whenever you buy or sell. And of course you pay a management fee, which is usually lower than those you would pay for mutual funds, but can be high for some “theme” ETFs.

Here are several other important considerations. Before buying ETFs you should know:

• ETFs can be volatile, even with the diversification they offer.
• The broader the ETF, the less volatility it is likely to have.
• The economic stability of countries when investing in international ETFs.
• The liquidity of ETFs you invest in.
• That you can run up commissions with frequent trading.

As we’ve mentioned before, ETFs are set up to mirror the performance of a stock market index or sub-index, so you can invest without having to do extensive research on individual stocks.

Worry too much about the future of big banks and you could miss out

Some investors fear the banks will lose out to “fintech” (upstart financial technologies, comparable perhaps to Uber or AirBnB). Or they wonder if the banks will get caught unawares when interest rates eventually make a significant upward move.

Our view is that the banks had a long time to prepare for the inevitable rise in interest rates, and the inevitable coming of fintech competition. In fact, they will probably wind up prospering in fintech, if not dominating it, as they did in stock brokerage, insurance and other financial areas that they have entered in the past few decades.

On the whole, investors have underestimated top Canadian bank investments, like a Canadian bank ETF, for as long as we’ve been in the investment business. As a result, these stocks often trade at attractive share prices.

Sustainable dividends are a key benefit of Canadian bank stocks

Some good banks reinvest a major part of their profits instead of paying dividends. But failing banks hardly ever pay dividends. So if you only buy bank stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst banks.

Banks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That also provides a hedge against inflation.

For a true measure of stability, focus on banks that have maintained or raised their dividends during economic and stock market downturns. These banks leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth. Top Canadian bank stocks are well known for their financial stability in the face of economic downturns.

Use our three-part Successful Investor approach to make better investment decisions—including with bank stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

How concerned are you about Canadian banks’ credit risks associated with home mortgages?